中国经济管理大学 Mini-MBA《营销管理学》：Developing Pricing Strategies and Programs
Developing Pricing Strategies and Programs
中国经济管理大学/中國經濟管理大學
I. Chapter Overview/Objectives/Outline
A. Overview
Price has become one of the more important marketing variables. Despite the increased role of non-price factors in the modern marketing process, price is a critical marketing element, especially in markets characterized by monopolistic competition or oligopoly. Competition and more sophisticated buyers have forced many retailers to lower prices and in turn place pressure on manufacturers. Further, there has been increasing buyer awareness of costs and pricing, and growing competition within the channels, which in turn provides the consumer with even more awareness of the pricing process.
In setting the price of a product, the company should follow a six-step procedure. First, the company carefully establishes its marketing objective(s), such as survival, maximum current profit, maximum current revenue, maximum sales growth, maximum market skimming or product-quality leadership. Second, the company determines the demand schedule, which shows the probable quantity purchased per period at alternative price levels. The more inelastic the demand, the higher the company can set its price. Third, the company estimates how its costs vary at different output levels, production levels, different marketing strategies, differing marketing offers, and target costing based on market research. Fourth, the company examines competitors’’ prices as a basis for positioning its own price. Fifth, the company selects one of the following pricing methods: markup pricing, target return pricing, perceived-value pricing, value pricing, going-rate pricing, and sealed-bid pricing. Sixth, the company selects its final price, expressing it in the most effective psychological way, coordinating it with the other marketing mix elements, checking that it conforms to company pricing policies, and making sure it will prevail with distributors and dealers, company sales force, competitors, suppliers, and government.
Companies will adapt the price to varying conditions in the marketplace. Geographical
pricing is one marketplace adjustment based on a company decision related to pricing distant customers. Price discounts and allowances are a second area for adjustment where the company establishes cash discounts, quantity discounts, functional discounts, seasonal discounts, and allowances. Promotional pricing provides a third marketplace option, with the company deciding on loss-leader pricing, special-event pricing, cash rebates, low interest financing, longer payment terms, warranties and service contracts, and psychological discounting. Discriminatory pricing, the fourth option, enables the company to establish different prices for different customer segments, product forms, brand images, places, and times. Lastly, product-mix pricing, enables the company to determine price zones for several products in a product line, as well as differential pricing for optional features, captive products, byproducts, and product bundles.
When a firm considers initiating a price change, it must carefully consider customer and competitor reactions. Customer reactions are influenced by the meaning customers see in the price change. Competitor reactions flow either from a set reaction policy or from a fresh appraisal of each situation. The firm initiating the price change must also anticipate the probable reactions of suppliers, middlemen, and governments.
The firm encountering a competitor-initiated price change must attempt to understand the competitor’s intent and the likely duration of the change. If swiftness of reaction is desirable, the firm should preplan its reactions to different possible competitor price actions.
To summarize, pricing involves the customer demand schedule, the cost function, and competitors’ prices. The question is how should a company integrate cost-, demand-, and competition-based pricing considerations? In setting a price the firm, for example Kodak, will have to consider the following cost-, demand-, and competition-based pricing decisions.
Cost-Based Pricing Decisions
Marginal analysis and break-even analysis are the two primary methods in cost-based pricing decisions.
Demand-Based Pricing Decisions -
Among the variables here the type of demand for the product (prestige, price-oriented, etc.), changes in buyer attitude toward price with changes in the economic environment (uncontrollable variables), and the elasticity of demand.
Competition-based pricing decisions -
To set prices effectively, an organization must be aware of the prices charged by competitors.
· Among the major questions here are: Will all competitors raise their prices by the same percentage? Will competitors react to cost increases more slowly to try to increase their market share? Will some competitors try to absorb much of the cost increases to induce brand switching?
B. Learning Objectives
· Understand the procedure(s) in establishing product or service price(s).
· Recognize how varying situational considerations influence price.
· Recognize and understand the factors considered in making a price change.
C. Chapter Outline
I. Introduction - Developing the point that price and pricing are increasingly important in the marketing mix and process. The issue that it communicates much about the firm’s intended value positioning. There are many emerging issues related to price-cutting, channel pricing, international pricing and pricing improved products. Opening vignette on Tiffany discusses how they offered a more affordable product line, which resulted in the challenge of managing the negative impact on its image and a subsequent pricing crisis.
II. Understanding Pricing
A. A Changing pricing environment –
1. The Internet has provided buyers with the power to discriminate between sellers by: performing more thorough and accurate price comparisons, usage of auctions and exchanges, and using efficient communications to acquire products for free.
2. Sellers also leverage the Internet to discriminate on pricing as buyers are more fragmented. Sellers also acquire more information on customer behavior and use it as part of their pricing strategy. Sellers also utilize auctions and exchanges.
3. The recent recession has generated a renewed environment as consumers, in response to job and economic uncertainty, have changed their purchasing behavior by focusing on more basic and cheaper products.
4. Another challenge is how to compete with free products. Refer to the insert “Marketing Skills: Giving it away” in this chapter.
B. How companies price
1. Size of organization influences who sets the price (i.e., owner sets in small organization, divisions or departments in larger organization with executive management direction
2. Industry dynamics influence structure of pricing department
3. Effective pricing requires a thorough understanding of consumer pricing psychology.
C. Consumer psychology and pricing - consumer purchase decisions are based on how they perceive price and what they consider to be the current actual price
1. Reference prices - compare price to an:
a) Internal reference price (pricing information from memory)
b) External reference (e.g., a posted “regular retail price”)
2. Price-quality references
a) Price used as an indicator of quality
b) Image pricing effective with ego-sensitive products (expensive car)
c) Alternative information about quality may reduce significance of price as a quality indicator
3. Price endings
a) “9s” i.e., consumers tend to view process left-to-right rather than rounding (i.e. $299 perceived in $200 range versus $300 range)
b) Price encoding in this fashion is important if there is a mental price break at the higher rounded price
c) If a company wants a high-price image, it should probably avoid the odd-ending tactic
III. Setting the Price – Firms set price for the first time when developing new products, when its current product is introduced into a new channel (distribution or geographic), and when it enters bids on new contract work. Six Step procedure for pricing:
A. Step 1: Selecting the Pricing Objective
1. Survival – short term strategy to overcome overcapacity, intense competition, or changing consumer wants Objective should be to cover all variable costs and if possible some fixed costs
2. Maximize Current Profit, cash flow or return on investment
3. Maximum Market Share (market-penetration pricing) – Assuming high price sensitivity, firms will lower price which should precipitate a dramatic increase in volume.
4. Market Skimming - appeals to high-end market segments, early adopter segments especially in rapidly changing technology markets (e.g. phones, tablets). Prices start high and drop lower over time. Good strategy when:
a) A sufficient number of buyers have a high current demand
b) Unit costs of producing a small volume are not so high that they cancel the advantage of charging what the market will bear
c) Initial high price does not attract competitors
d) High price communicates the image of a superior product
5. Product-Quality Leadership - premium quality connotes premium price
6. Other Pricing Objectives usually adopted by non-profit and public organizations - cost recovery (partial or full) and social pricing
B. Step 2: Determining Demand – each price leads to a different level of demand and has a different impact on a company’s marketing objectives
1. Price Sensitivity - Table 12.1 lists some characteristics associated with decreased price sensitivity
a) Customers are less sensitive to low-cost items or items purchased infrequently
b) Seller can charge a higher price than competitors if customers are convinced it offers a lower total cost of ownership (TCO)
c) Internet has potential to increase price sensitivity but must also target non-price-sensitive consumers as well as to not leave “money on the table”
2. Estimating Demand Curves – several different methods of measurements
a) Conduct surveys – information somewhat subjective
b) Experiment by changing prices for same product without alienating consumers or violating regulatory requirements
c) Statistically analyze past prices, quantities sold and other factors to gain understanding of price/demand relationships
3. Price elasticity of demand (refer to table 12.1 for example of factors leading to Price sensitivity)
a) Determination of the affect of a change in price on overall demand
b) If demand changes considerably with a change in price, it is elastic. If demand does not change significantly or in parallel with the price, it is inelastic
c) Long-run price elasticity – buyers continue to purchase from current supplier after a price increase but eventually switch suppliers.
C. Step 3: Estimating Costs
1. Types of Costs and Levels of Production - fixed, variable, total, and average costs
a) To price intelligently, companies need to know its costs with different levels of production
b) To estimate the real profitability of selling to different types of retailers or customers, firms should use activity-based-cost (ABC) accounting instead of standard cost accounting
2. Accumulated Production –
a) Average cost falls with accumulated production experience also referred to as experience curve or learning curve
b) Experience-curve pricing can be risky because aggressive pricing might create a cheap image
c) Advantages from experience curve may lead to expansion which is a risk if there is a major technology improvement which reduces or eliminates competitive advantage and passes the advantage to other firms who adopt new technology rendering current technology obsolete
3. Target costing - determine price that must be charged according to market research
D. Step 4: Analyzing Competitors’ Costs, Prices, and Offers (evaluate from customer perspective, compare, value and reaction)
E. Step 5: Selecting a Pricing Method - Figure 12.2 summarizes three major considerations in price setting, ceiling, floor and orientation point.
1. Markup pricing - standard mark-up, but can vary according to product categories. Markup price = unit cost / (1 – desired return on sales)
2. Target return pricing - to make a fair return on investment. Target-return-price = unit cost/(desired return X invested capital)/unit sales. Figure 12.3 contains a break-even chart.
3. Perceived value pricing - based on buyer perceptions. Many firms are now adopting this approach. Table 12.2 shows key considerations in developing value-based pricing.
4. Value pricing – fairly low price for a high quality offering
a) Everyday low pricing (EDLP),no promotions and no change to price. This eliminates week-to-week price uncertainty. The reason firms have adopted this price strategy is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices.
b) High-low pricing – Charge higher prices on an everyday basis but run frequent promotions with prices temporarily lower than the EDLP level.
5. Going rate pricing - base price on that of competitors (“follow the leader”)
6. Auction-type pricing growing in more popularity. Must qualify supplier pool before using price/cost as major decision variable in B2B situations.
a) English auction - ascending bids with one seller and many buyers
b) Dutch auctions (descending bids) – two types
(1) Auctioneer announces a high price for a product and then lowers the price until a bidder accepts
(2) Buyers announce something they want to buy and potential sellers compete to offer the lowest price
c) Sealed-bid auctions – would-be suppliers submit only one bid and do not know the contents of the other bids. The government uses this method frequently to secure goods and services.
F. Step 6: Selecting the Final Price
The influence of other marketing activities - brand’s quality and advertising relative to the competition (know brands with high quality and high relative advertising can command higher prices)
1. The influence of other marketing-mix elements - note relationships between relative price, relative quality, and relative advertising
2. Company pricing policies - contemplated price must be consistent (Refer to Marketing Insight: Stealth Price Increases” insert in the text.
3. Gain-and-risk sharing pricing - risk losing customers if cannot deliver full promised value
4. Impact of price on other parties - distributors, sales force, competitors, suppliers, government, etc.
IV. Adapting the Price
A. Geographical Pricing (Cash, Countertrade, Barter) Company decides how to price its products to different customers in different locations and countries.
1. Countertrade - offer other items as payment
2. Barter - direct exchange of goods with no money or third party involved
3. Compensation deal - payment consists of a combination of products and cash
4. Buyback arrangement - sell plant or equipment and receive goods manufactured with same for partial payment
5. Offset - receive full cash payment but agree to spend much of the cash in respective geographic area within a specified amount of time
B. Price discounts and allowances - cash discounts, quantity discounts, functional (trade) discounts, seasonal discounts, allowances, trade-in, or promotional) (refer to table 12.3 for detailed discussion price discount and allowance types)
C. Promotional Pricing – Objective is to stimulate early purchase
1. Loss-leader pricing - to stimulate traffic
2. Special event pricing - to draw customers
3. Special customer pricing – special prices to different customer groups, e.g. brand community
4. Cash rebates - to encourage purchase within a specified time period
5. Low-interest financing - to facilitate purchase
6. Longer payment terms - for lower monthly payments
7. Warranties and service contracts - added value
8. Psychological discounting - set an artificially high initial price
D. Differentiated pricing - adjust base price to accommodate differences in customers, products, locations etc. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs
1. First-degree price discrimination – seller charges a separate price to each customer depending upon the intensity of his/her demand.
2. Second-degree price discrimination – seller charges less to buyers of larger volumes
3. Third-degree price discrimination – seller charges different amounts to different classes of buyers. Examples are :
a) Customer-segment pricing - different prices for different groups
b) Product-form pricing - different versions priced differently
c) Image pricing - same product at two different levels
d) Channel pricing (location pricing) - same product priced differently at different locations
e) Location pricing – same product is priced differently at different locations even though the cost of serving the different locations is the same
f) Time pricing - same product priced differently at different day, time or season (Yield pricing is an offer of a lower price on unsold inventory before it expires.)
4. Price discrimination works when:
a) Market is segmental and segments show different intensities of demand
b) Members in the lower price segment cannot resell the product to the higher-price segment
c) Rivals cannot undersell the firm in the higher-price segment
d) Cost of segmenting and policing the market does not exceed the extra revenue derived from price discrimination
e) Practice does not breed customer resentment
f) Form of discrimination is not illegal
E. Product-mix pricing
1. Product-line pricing - price steps
2. Optional-feature pricing - in addition to main product
3. Captive-product pricing - main products that require ancillary products
4. Two-part pricing - fixed fee plus variable fee based on usage
5. Byproduct pricing - to recoup production costs of main product
6. Product-bundling pricing - less costly when purchased together
V. Initiating and Responding to Price Changes
A. Initiating Price Cuts
1. Excess capacity
2. Drive to dominate the market through lower costs.
3. Price –cutting can lead to possible traps:
a) Customers assume quality is low
b) A low price buys market share but not market loyalty because customers will shift to lower-priced firms. These customers are sometimes referred to as “transaction buyers”.
c) Higher-priced competitors may match the lower prices but have longer staying power because of deeper cash reserves
d) A price war may be triggered
B. Initiating Price Increases – reasons may include:
1. Cost inflation – profit margins are squeezed by rising costs unmatched by productivity gains
2. Anticipatory pricing - raise price in anticipation of higher costs or inflation
3. Over-demand – when a company cannot supply all of its customers it may use one of these pricing techniques:
a) Delayed quotation pricing – final price set after the product is finished or delivered. Prevalent in industries with long lead times.
b) Escalator clauses – company requires customer to pay today’s price and all or any part of inflation increase that takes place before delivery
c) Unbundling – company maintains its price but removes or prices separately one or ore elements that were part of the former offer, such as free delivery or free installation
d) Reduction of discounts
C. Responding to Competitors’ Price Changes
1. Must take into consideration the following:
a) Product’s life cycle stage
b) Product’s position in the portfolio
c) Competitor’s intentions and resources
d) Market’s price and quality sensitivity
e) Behavior of costs with volume
f) Alternative opportunities
2. with high homogeneity, either augment product or reduce price
3. In non-homogenous product markets must determine why the competitor changed price, predict if possible the response of other firms, and determine results if no action is taken by the firm in response the price change
VI. Executive Summary
II. Lecture
“Measuring the Impact of Price—How Important is the Pricing Variable”
This discussion deals with pricing strategy in a marketing setting, and the role and value of effective pricing in the overall marketing strategy and implementation effort. It begins with examples of pricing problems and options as a means of maintaining or increasing the firm’s market position. This leads into a discussion of the implications for the introduction of various pricing strategies for the firm and an industry.
It is useful to update the examples so that students will be able to identify readily with this concept based on their general knowledge of the companies and products involved in the lecture/discussion.
Teaching Objectives
· To stimulate students to think about the critical issues, pro and con, for a firm when it moves toward adoption of a formal or informal pricing strategy.
· Develop points to consider in proceeding with a specific pricing strategy.
· Better understand the role of pricing strategies and policies in helping the firm achieve a balanced position vis á vis the customer and the competition.
Discussion
Introduction
Pricing policies in many companies tend to be based more on intuition and what the market will bear more than scientific or objective criteria. However, this approach is beginning to change, in line with many other changes taking place in marketing and in the U.S. and global economies. Pricing has become a key issue for both consumer and business marketers, and sadly it is a problem area where few managers are well prepared. Pricing is not part of most university programs, largely because it long has been considered part of the world of economics, “the dismal science”.
Marketing professionals have tended to ignore pricing theories and concepts, and in the past they did not even consider it as an equal part of the marketing equation. Accordingly, pricing and the impact of price have been studied very little, but clearly it is and should be one of the more important aspects of the marketing process. To most contemporary marketing professionals, pricing is a final and very important marketing strategy focal point. Without an effective pricing analysis and price decision, the rest of the marketing process is left unfinished.
Role of Pricing
Pricing can and does help a company attain its other marketing objectives. As a result, pricing strategy should be tied closely and carefully to the overall business, competitive, and marketing strategy. Further, the pricing program should be supported with a focused plan of implementation. Pricing enables the marketer to segment markets, define products, create customer incentives, and even send signals to competitors.
For example, if the company wants to enter a crowded field, such as the credit card business, it may opt for a penetration strategy. This is what Sears did with the Discover card. The retailer obtained as many customers as possible through a low price (i.e., no membership fee), and established a position in the market. Skimming would be the opposite strategy, pricing a product at a high level to “skim” the innovators. That way, the firm obtains high profits at the beginning of the product life cycle, effectively covering the development costs. After the firm pays for the development costs, it has the option to move the price down to the next level to achieve other marketing objectives. Either strategy can work, but the decision, implementation and results all depend on the firm’s marketing objectives.
Many marketing professionals argue that pricing is a valuable strategic weapon that helps companies enhance and capitalize on competitive vulnerability, and there is no question that pricing decisions have an immediate impact on a company’s bottom line. From this perspective, it is easy to argue that to a large degree, pricing decisions can determine whether a product and/or a company will succeed or fail.
Pricing Limits
The first thing a pricing strategy process would determine is that there is an upper and lower price boundary, and each has to be considered. The upper boundary, the economic value of the product, basically is the most an informed consumer is willing to pay for the product. Marketers determine this boundary by comparing the product with a reference product, and asking what attributes the product has that are above, or below, the value of the product offered by the competitors. Clearly, if a product is below the value of the competition, it is almost impossible to set the price higher than the competitive price.
Next, the marketer should identify the best available alternative product for the most important customer market or segment. The marketer could ask: “Other than the obvious benefit, what additional benefits does this product provide?” Many times the benefit is labor savings or additional productivity. Other times there could be emotional benefits, or some other intangible benefit.
Once the list of benefits is completed, it is time to assign a value to each benefit. Some benefits are quantifiable directly, such as labor savings. The analyst can calculate the number of hours saved times the wage rate. If there is another specific benefit, the firm may try to determine the value. For example, the marketer may analyze possible substitute products to determine if there are other benefits that related products might have that eventually prove important in the competitive process. It is appropriate to make an effort to determine the approximate value of each such benefit to determine if and when prices should be adjusted.
Another technique that can be useful in determining the upper boundary of a particular product’s price is a conjoint study, or survey, of various customers. With this approach, prospects are invited to select from a series of pricing options for the product. In the survey, the researcher attempts to determine the value of the product’s particular attributes. Once the firm has obtained this data, they have found the upper boundary of the product’s potential price.
It is critical to approach the process from the customer perspective, separating what the company thinks of the economic value and the customer’s perceived economic value. Unfortunately, some companies care so much about the product, that they consider every benefit at the high end. The result is that the survey research has to determine whether people will believe what the company believes concerning price and value.
The Role of the Customer
There are many examples of the role of the customer in the pricing process, and one of the better examples comes from Datastorm, a software firm that made the ProComm Plus, an early software product that linked computers to networks through a modem. The market for this software was already beginning to grow in 1991, just when ProComm Plus was scheduled for its debut, and competing products were already on the shelves, priced at a premium. Datastorm believed that it could tap pent-up demand for lower-priced communications software in the consumer market, so the strategy was to set the price of the product at $179, dramatically less expensive than the competition. The company maintained that pricing point for four years. Datastorm dominated the field, with an 85 percent market share among IBM computer users, until 1995-96. Many analysts credit the company’s pricing strategy as the key to its success.
What the marketing managers at Datastorm did, consciously or unconsciously, was to follow a well-defined market-oriented process to pick new product prices. The focus was on the three Cs: customer, company, and competition. To employ this simple marketing tool, Datastorm managers set the price of a new product based on the customer’s perception of a fair price. Of course, the customer’s perception of what was a fair price often was based on the competitor’s price that typically the consumer perceives as on the high (economic) end of the scale. This approach can be quite useful for those selling into an established market, or even if they are selling into a new market, if the measurement is performed properly.
Micro-marketing also plays an important part in pricing strategy. Stores, such as the Midwestern grocer Dominick’s, engaged in micro-marketing by using pricing data obtained from scanners and measured by Information Resources Inc., and A.C. Nielsen. Nielsen’s program measured the differences in elasticities between stores and matched prices so that customers who cared more about price got discounts, and customers who cared about other factors could receive those benefits.
To determine low-end pricing for a particular product, it is important to adopt a customer perspective. As noted above, companies often are so aware and care so much about the product that every benefit is considered at the high end in price-value. Of course, the obvious question is whether individual consumers and the marketplace have the same perception of value and price.
The marketer also must examine the variable costs, or incremental costs, that matter to the consumer. A common error is that companies consider variable costs as part of fixed costs. In an airline, if you have a seat, and you consider the average cost of the plane, and the crew, it might turn out that the average cost per seat was $10. However, if the plane is sitting on the runway, ready to take off, the variable cost might be as low as $1. At this point, the differences between fixed and variable costs look very different. This the way it is with highly perishable and time-sensitive goods and/or services. The variable cost tells you what you are gaining for each additional customer. If you raise that price too high, you likely consider additional customers as not as valuable as they truly are in the final analysis (such as when the plane is setting on the runway, ready to take off).
Firms that inflate their variable costs tend not to cut their prices very often. They do not realize the true incremental revenue they can gain from a discount. Experts advise against putting overhead costs into the price of the product because they are fixed, not variable, costs. By folding overhead costs into the equation, the firm may be distorting the pricing decision. The essence of the matter is that empty hotel rooms or plane seats are revenue never to be regained. It is better to have something than nothing. This is an attitude that has gained considerable popularity since 9/11 as the airlines and other industries watched their carefully developed strategies based on their perceptions of value go down the drain.
The relationship between the quality of a product and a particular price is always an issue. Price sensitivity research has provided much information that can help determine the relationship of price to quality. Consumers ask: ‘Is this better if it is more expensive?” In response, marketers apply the principles of “odd” versus “even” pricing. Research in pricing indicates that something at $9.99 versus $10 is generally associated with Sears, Kmart, and JCPenney. It puts the emphasis on the first digit. The implication or perception is that the retailer is trying to save the consumer money. If a retailer sells a Packard-Bell computer for $1,999.95, there is only a five-cent difference between that and $2,000. However, many people place emphasis on the first number. On the other side of the scale, Nordstrom and other high-end retailers price in even numbers. This lends an aura of quality to the product. There is also prestige pricing, where you effectively advertise that you have the most expensive perfume in the world. This is strictly a matter of old-fashioned snob appeal, but it works, depending on your market segment.
The Art of Naming a Price
After the price limits, high and low, are determined, we enter into what essentially is the “art form” of pricing, often referred to as “the art of pricing.” There are particular aspects of pricing that will determine where the firm will price, based on these upper and lower boundaries, without much price sensitivity or elasticity. Here there are issues such as “fairness.”
Fairness is gauged by thinking about how a customer feels about the price of a product. Research shows that price increases are perceived as fair if they are based on increased costs, but those based on the characteristics and/or circumstances of the customer are considered unfair. One of the major pricing issues in recent years is that of “everyday low pricing”. This is where the retailer charges a constant, lower price at all times, with no temporary price discounts. This approach reduces uncertainty among consumers, and it helps to restore faith in the price of a brand. It also contrasts sharply with the so-called “high-low” strategy of companies that rely on constant price promotions. Discounters such as Wal-Mart led the trend toward “everyday low pricing,” but the concept generally is more popular in the South than in the North.
Whatever pricing tactics the firm chooses, it is important to remember that pricing is essential to strategy and should not be treated as an afterthought. Strategic pricing should be one of a business’s most potent competitive weapons, and substantial sales potential may well be lost without an effective planning and control effort in this important area of marketing activity.
III. Background Article
Issue: Pricing Online Content
Source: “From Free to Fee,” Marketing News, August 5, 2002.
Marketers Mull Formulas for Charging Consumers
As the online advertising market continues to struggle, many online content marketers are wrestling with the issue of how to add at least some level of paid subscription income to their revenue mix in order to reach or improve profitability. Since the business of selling content online is still basically in its infancy—and many consumers clearly still think of Web content as simply and rightfully free—few roadmaps are available to show the way to effective marketing strategies, but some guiding principles have emerged.
The stories behind successful online content marketers show that to make the switch from free to fee, a site must first and foremost forget about consumer surveys and simply have faith that its offering is of high enough quality and is sufficiently unique to entice consumers to pay. Second, good old trial and error seems to be the only realistic method for making the two key
pay-for-content marketing decisions: How much to charge site visitors and where to place the site’s so-called wall that divides free and paid-access content.
According to the head of the Wall Street Journal Online operations is that many on-line firms are looking at is that they have a massive audience coming to their free site, and what kind of price will not bring that down to zero. As online content providers ponder their options, consumers are trying hard to scare them away from introducing any access fees at all. In a March online survey of more than 2,000 U.S. consumers, conducted by Jupiter Media Metrix in New York (now a division of comScore Networks Inc., based in Reston, Va.), 71 percent of respondents said they either “strongly” or “somewhat” agreed with the statement which read, “I can’t understand why anyone would ever pay for content on the Internet.” But online content marketers advise ignoring consumer surveys on this point.
“To ask someone who’s been using a site for free if they would like to start paying is not going to get you a straight answer,” says the president and CEO of AskART.com, based in Phoenix, which successfully switched a portion of its content from free to fee in October. The site, with an average of 75,000 unique visitors a week, offers information on American artists and their paintings, including art auction records and other collector’s information, that at first was offered at no charge but is now kept behind a paid access wall, with prices ranging from $9.50 for one-day access to $19.50 for monthly access.
AskART says from the time the site was launched as a totally free offering in spring 2000, they always planned to make a portion of it paid access, because they had confidence that art collectors would recognize the value and be willing to pay. So far, his faith has been validated: As of June 2002, the site had some 10,000 paid subscribers, and the added revenue stream (the site also gets revenue from paid listings of art dealers and banner ads) enabled askART.com to achieve profitability for the first time in February 2002.
Similarly, WSJ.com, initially launched in mid-1995 as a partial, free version of the Wall Street Journal print newspaper, offered a full-text, online version of the printed journal for free from April to August 1996 as a trial, but “always with the notion that it would switch,” to a pay-for-access model. The company held firmly to this business plan because its management was confident that their online content was “high value;” now, WSJ.com has 640,000 paid subscribers.
In the consumer market arena, Ancestry.com, launched as a free site in June 1996 but has been a pay-for-content site since June 1997. Ancestry.com offers subscribers online access to a wide range of databases—from draft records to parish records to foreign census reports—to help them track their family trees. Some of the historical records databases posted, queried and maintained online by Ancestry.com are proprietary to the site, while others are in the public domain, but are often only accessible to the public for free if they travel to regional or national libraries and record centers here and abroad. The site has more than 700,000 paid subscribers.
Sources say once site management has decided to begin charging for access, the next steps—setting price points and positioning the wall(s)—usually must be navigated by good old trial and error.
An online content analyst for Forrester Research says that when it comes to determining price points for online content subscriptions, “Generally, the highly scientific method being used is putting a dart board up against the wall, and then throwing darts at numbers.” While sources say a bit more thought than that goes into their pricing decisions, they admit there is no magic formula. Rather, marketers have to take a stab at pricing and be ready to make adjustments if necessary.
For example, when it came to setting the prices for archived news articles and crossword puzzles on the New York Times on the Web (www.NYTimes.com), “A big part of it was just trial and error,” says the vice president of business development at NYTimes.com, which has charged fees for portions of its online content since 1997. NYTimes.com also constantly monitors how visitors react to online content fees. For example, management decided last year to double the price of the Times daily online crossword puzzle, to $19.95 annually, because the number of paid subscribers and their frequent visits had shown “we had an extremely loyal user base that absolutely couldn’t live without the crossword, and we had never raised the price.” The crossword’s loyal audience did not diminish after the price hike.
With no precedent to follow in terms of pricing paid subscriptions for a full online version of a major daily newspaper, WSJ.com executives also took an educated guess. They wanted to make sure the price in the early days was modest enough so that people would see it as a bargain, and also recognized the need to make a special provision in online subscription pricing to accommodate existing print subscribers. WSJ.com thus decided on a fee of $ 49 per year (for full access to the online Journal) initially, but only $29 per year for print edition subscribers. After two years, when the site had a core of loyal subscribers, the base price was raised to $59 for online-only subscribers (to boost revenues and help pay for subsequent site improvements), while print subscribers paid a steady $ 29 per year, as a means of offering
increased incentive. (In July 2002, the company raised its rates to $79 for online-only subscribers and $39 for print subscribers.)
The site only lost about 40 percent of average daily users when the switch was made from free to fee in August 1996. Like WSJ.com, Ancestry.com pricing strategy was to simply “offer services and test results,” Sherman says. Ancestry.com also had no similar pay-for-content family history sites against which to compare prices, and the company did not survey existing site visitors to ask how much they’d be willing to pay before putting up the wall.
Ancestry.com annual fees currently range from $79.95 to $189.95, depending on the number and type of databases the customer wants to access. However, to entice site visitors who might be reluctant to subscribe, there is a special quarterly (three months, no commitment) rate of $29.95, a key part of Sherman’s strategy.
“Our goal is to invite the customer in at a low entry point and aggressively upgrade them,” via a combination of follow-up e-mails, customized banners, and phone calls to let the customer know they can get more family history information out of the site by upgrading their subscription. Sherman says a large number of the $29.95 subscribers are eventually upgraded to more expensive annual subscriptions through his team’s array of follow-up marketing efforts, although he will not reveal the total number or percentage of successful upgrades the site had garnered.
Ancestry.com, which derives about 80 percent of total revenues from subscription fees and the rest primarily through on-site banner ads, has adjusted its subscription prices upward by $10 per year across the board for the past three years to reach current levels, with corresponding increases in more historical records made available to subscribers. According to the director of public relations for Ancestry.com, the price increases turned out to be in line with demand, because none prompted any declines in paid subscribers or total monthly unique site visitors, which now average 7.5 million per month.
The other key strategy decision that content site marketers confront is where to place the wall between free and paid-access content. Marketers agree that at least some level of free content is a must in order to lure subscribers, but exactly how much to leave out on the “front porch” for free is again usually decided by way of an educated guess, and subsequent adjustments are made if necessary.
Ancestry.com offers approximately half its content for free because the key to getting people interested in a paid subscription is giving them a taste of success, and in our case a taste of success is finding records on an ancestor. Once visitors find some ancestor records in one of the site’s free databases, they frequently “get hooked” on tracing their family tree. Further research for more compelling family records—such as an actual photo of their ancestor’s signature in a WWII draft record—will more than likely bring them right to the paid-access wall.
They try hard to keep pushing the envelope toward offering a lot of free content because they know that eventually they will get the viewer to pay. They believe that just as when the site first switched to paid content, the site’s “juicy” databases—such as historical parish records from England and Ireland dating from 1538 to 1837—are of sufficient value that people will agree to pay even after they’ve taken advantage of the free content.
By contrast, WSJ.com is so confident about the value of its content that very little—only a home page of short news blurbs—is available for free. However, the site’s initial free access period (April to August 1996)—during which time the site repeatedly used on-site notices to inform site visitors of its plans to start charging for content—played a supporting role in prompting subscriptions. WSJ.com has since then seen no reason to adjust the wall.
Until a site throws up a barrier and takes the plunge into paid content, experts say it’s impossible to forecast whether regular site visitors will eventually accept the fees. But one thing seems certain: With the online advertising market continuing to slump, Internet users are likely to encounter more paid access walls around content.
IV. Cases:
A. Cumberland Metal Industries: Engineered Products Division (1989)
HBS Case: 580-104 TN: 585-115
Teaching Perspectives
Cumberland Metal Industries (CMI) had a substantial sales drop, and income declined even more substantially (39%) This prompted the firm to pursue new applications of their curled metal fabrication technology. The company has evidently discovered the cure for the ills with a new product, curled metal pile driver pads. Two field tests show these pads offer customer benefits many times CMI’s cost. Management believed that a successful introduction
“could as much as double sales.” The group manager of the Mechanical Products Group was responsible for the development of a marketing plan for the introduction. Of particular concern is the price to charge for the pads in view of the benefits provided.
The case introduces the concept of “value pricing,” i.e., pricing that gives preeminence to the value customers place on a product rather than on its costs. It reinforces the utility of careful numbers, work as it presents data that allows precise calculation of the value of a new product (pile driver cushioning pads) to the end user. As such, the pricing decision is the focus of the case. Students must integrate values derived from the field tests, firm costs, competitive considerations, and the differing attitudes of members of the decision-making unit.
The case opens with the group manager stating, “About the only thing we have to do is figure out how to price it.” One of the main lessons derived from the case is, however, that a pricing decision cannot be made in isolation from the decisions on the marketing support activities the firm provides. This sets out the marketing challenge faced by the firm and the obstacles any proposed introductory marketing plan must overcome. Finally, the discussion can turn to an integration of the marketing and manufacturing decisions.
Marketing Challenges
Perhaps the biggest problem facing CMI is how to communicate the benefits of the CMI pads in such a way that the potential customer’s perceived value approaches the true value as measured in the test. The 11-inch diameter, 1-inch thick, 151-pound doughnut shown in Case Exhibit 4 certainly does not look like it is worth $1,000. Also, the industry has not paid much attention to pads, never viewing them as a resource-saving tool.
CMI currently has no mechanism in place to accomplish this communication task. It has not established account relationships. Also, CMI has had a struggle finding a reliable contractor to produce and monitor its performance.
A second problem is that there are no well-established channels of distribution for this type of product. CMI is leaning toward using manufacturers’ representatives. If CMI were to follow this route, a rep training, support, and monitoring program would have to be developed.
A good way to stimulate debate on pricing is to get both a value-oriented and a cost-based price on the board. The difference between the two prices is remarkable and yet strong arguments can be made for either position. In some sense, it is a skim- versus penetration-pricing argument. The instructor should note the need for consistency among program elements.
Questions
1. What’s should be the price for the curled metal pads? Why? (Get out many different bids.)
2. How much do you think the pad is worth to a customer? What does the test data tell you?
3. How big is this market? What is the opportunity?
4. How much does the price affect the market share?
5. Is it more important to make high profits or to build market share?
6. Who has to say “yes” to sell a GMI pad? Would any of these parties like to see curled metal pads fail? Why?
7. How should the company market the pad? Describe in detail the channel members, influencers and others, and provide a plan.
B. Case: Becton Dickinson & Company: VACUTAINER Systems Division
HBS Case: 592-037 TN 595-084
Teaching Perspectives
Becton Dickinson, a phenomenally successful company, with an 80 percent market share in the blood collection needles and syringes market, faces a change in the customer buying environment (cost containment pressures at hospitals). The marketing vice president must make certain decisions to complete his marketing plan.
Becton Dickinson’s VACUTAINER Systems Division (BDVS) produces blood collection tubes and needles for sale to hospitals, commercial labs, and other areas such as physicians’ offices and surgicenters. In 1985, the health-care industry in general, and hospitals in particular, are affected by governmental cost control.
Within this context, Mr. William Kozy, BCVS’s national sales director, and Mr. Hank Smith, BDVS’s vice president of marketing and sales, are negotiating a contract with personnel at Affiliated Purchasing Group (APG), a large hospital buying group.
The immediate issue is how to respond to APG’s demands concerning pricing, labeling and distribution terms. But the outcome of the APG negotiations will impact BDVS’s negotiations with other purchasing groups, relationships with its current distributors, and the division’s traditional marketing and sales strategy. Accordingly, the longer-term issue is, how should BDVS conduct its business in a changing, volatile marketplace?
The BDVS case concerns a drama of shifting power and entangling alliances among a major supplier, buyer, and distributor in a marketplace undergoing significant changes in demand demographics and buying behavior. In addition, the case concerns a crucial and common task in sales and marketing: the conduct of important, high-level, face-to-face contract negotiations. It requires students to analyze what is at stake in the BDVS/APG negotiations, which party is gaining or losing power as the market changes, which of several “demands” is likely to be truly important to each party, and how BDVS managers should respond to the latest (and seemingly final) round of negotiations with APG managers. Thus, the case is suitable for use in the distribution or pricing modules of a general Marketing Management course,
Questions
1. What are the important changes in the health-care market, and what are the implications for Becton Dickinson (BD) and its BDVS division?
2. How important is the APG contract for BDVS? What’s at stake for BDVS in winning or losing this contract?
3. How important is each aspect of the negotiations (pricing, brand name, and delivery terms) for each party explicitly or implicitly involved (APG, its member hospitals, BDVS, BDVS’s distributors, and competing suppliers)?
4. Given the analysis, what should BDVS do?
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